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Encyclopedia of Chart Patterns First Edition,
(a later edition is pictured), pages 631 to 641. Below is updated performance information based on tests in February 2013. Also note that this pattern is only in the first edition of the Encyclopedia.

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Important Bull Market Results for Downside Weekly Reversals

The above numbers are based on hundreds of perfect trades as of 2/6/2013. See the glossary for definitions.

* Based on the trend high, not the ultimate high. See text.

** Based on the average drop compared to other small patterns with downward breakouts in a bull market

Downside Weekly Reversal Identification Guidelines

Characteristic

Discussion

Weekly data

Look for downside weekly reversals using weekly data (weekly scale) on the chart.

Price trend

Prices should be trending up leading to the pattern.

2 weeks

Downside weekly reversals are a two-bar pattern.

Shape

On the second bar of the pattern, look for a higher high and lower low (an outside week). The price bar spans beyond the prior week's range.

Lower close

The last bar must close below the prior bar's low.

Downside Weekly Reversal Trading Tips

Trading Tactic

Explanation

Reversal

The pattern is supposed to act as a reversal, and it does, 62% of the time (bull market, down breakout).

Breakout

A breakout occurs when the stock closes either above the top of the pattern or below the bottom of it.

Trade with the trend

Since downside weekly reversals act as reversal patterns most often, expect the breakout to be downward.

Wait for breakout

Wait for price to either close above the top or below the bottom of the pattern before taking a position.

Measure rule

The downside weekly reversal fulfills the measure rule 52% of the time (bull market, down breakout). That is, measure the height of the second bar and add it to the high price to get an
upward breakout target or subtract the height from the low price to get a downward price target.

Downside Weekly Reversals Example

I show three downside weekly reversals on the weekly chart.

Notice that in each pattern, the second bar is taller than the prior bar. If this were on the daily scale, the pattern would resemble an outside day.

The first downside weekly reversal occurs in January after a long up trend. The reversal correctly predicts a downward move.

The second pattern, in August, acts in a manner similar to the first one. The inbound trend is upward and price breaks out downward.

The last pattern, in October, sees price move sideways. Not shown, but the breakout from this downside weekly reversal is upward because price closes above the top of the pattern in
February 2011.

Downside Weekly Reversals Performance Statistics

For the following statistics, I used 1,234 stocks, starting from December 1989 to December 2012, but few stocks covered the entire range. All stocks had a minimum price of $5.
There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009.
Everything outside of those dates represents a bull market.

For each downside weekly reversal, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 5 bars
(11 bars total) each, before the downside weekly reversal and the same peak/valley test after the downside weekly reversal. The closest valley or peak before the downside weekly
reversal is where the trend began. The closest peak or valley after the downside weekly reversal is where the trend ended.

Since this is a downside weekly reversal, I excluded all of those patterns with a downward price trend. That is, I only used those appearing after an upward price trend on the
weekly chart.

The 5-bar peak or valley number tends to find major turning points on the weekly charts. In this case, 'bar' means week since I only used weekly data.

I measured performance from the breakout price (the second week's high or low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Table 1: Performance After the Downside Weekly Reversals Pattern

Market Type, Breakout Direction

Avg Rise/Drop

Bull market, up breakout

18%

Bull market, down breakout

-12%

Bear market, up breakout

14%

Bear market, down breakout

-26%

Table 1 shows the performance of downside weekly reversals from the breakout to the trend high or trend low, sorted by the breakout direction and market type.

For example, those downside weekly reversals in a bear market after a downward breakout perform best by losing 26%. The worst performance comes in a bull market after a downward
breakout (a loss of 12%). This makes sense. When the trade is in line with the primary trend (bull market, up breakout or bear market, down breakout) the pattern outperforms
the counter trend moves.

Downside Weekly Reversals Failure Rates

Table 2: Failure Rates

Market Type, Breakout Direction

5% Failure

Average Rise/Drop

Bull market, up breakout

16%

18%

Bull market, down breakout

24%

-12%

Bear market, up breakout

21%

14%

Bear market, down breakout

10%

-26%

Table 2 lists the failure rates, sorted by market condition and breakout direction along with the average rise or decline after the breakout.

A failure occurs when the stock fails to move more than 5% in the direction of the breakout.

For example, in a bull market after an upward breakout, 16% of the downside
weekly reversals failed to see price rise at least 5%. However, the average rise was 18%.

Downside Weekly Reversals Measure Rule

Table 3: Measure Rule Performance

Market Type, Breakout Direction

Success

Bull market, up breakout

72%

Bull market, down breakout

52%

Bear market, up breakout

54%

Bear market, down breakout

70%

Table 3 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target for an upward breakout.

For downward
breakouts, subtract the height from the lowest low in the pattern. Ignore price predictions below 0 and those that represent a large percentage move.

The table says that the measure rule works best in a bull market after an upward breakout (72% work), but the bear market/down breakout combination is close (70% work).

Downside Weekly Reversal Trading Performance

Table 4: Testing the Downside Weekly Reversal

Market/Breakout direction

Bull/Up

Bull/Down

Bear/Up

Bear/down

Net profit/loss

$132.39

$(135.13)

$(114.78)

$99.59

Wins

60%

40%

44%

53%

Winning trades

1,624

1,643

224

575

Average gain of winners

$726.93

$771.40

$758.10

$893.26

Losses

40%

60%

56%

47%

Losing trades

1,087

2,447

280

505

Average loss

($755.87)

($743.81)

($813.09)

($804.09)

Average hold time (calendar days)

36

33

24

20

Table 4 shows the performance based on 8,430 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest,
fees, slippage and so on.

If price closes above the pattern's high, buy at the open the next day.

If price closes below the pattern's low, short at the open the next day.

Sell/cover when price moves 7% in the direction of the breakout.

If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from a downside weekly reversal, the net gain was $132.39 for all trades. The method won 60% of the time and there were 1,624 winning
trades. The average gain of winning trades was $726.93.

Forty percent, or 1,087 trades were losers. They lost an average of $755.87.

The average hold time was 36 calendar days.

Downside Weekly Reversal Trading Performance With Pattern Stop

Table 5: Testing the Downside Weekly Reversal with Pattern Stop

Market/Breakout direction

Bull/Up

Bull/Down

Bear/Up

Bear/down

Net profit/loss

$166.67

$(172.86)

$(172.24)

$171.17

Wins

68%

52%

57%

73%

Winning trades

1,851

2,145

285

791

Average gain of winners

$721.76

$760.95

$741.23

$857.84

Losses

32%

48%

43%

27%

Losing trades

856

1,941

219

290

Average loss

($1,033.64)

($1,204.80)

($1,361.00)

($1,701.77)

Average hold time (calendar days)

44

47

39

35

Table 5 shows the results of 8,420 trades, but this time, a penny below the bottom of the downside weekly reversal pattern (upward breakout) or a penny above the top of the
downside weekly reversal pattern (downward breakout) was used as a stop instead of a 7% stop.

In all cases, the average loss increased substantially. Net profit and net loss both increased slightly as did the win/loss ratio when compared to a 7% stop.

Downside Weekly Reversal Trading Example

The figure shows a downside weekly reversal pattern in Alcoa on the weekly scale.

The downside weekly reversal begins the week before prices peak on the chart (A).

After the pattern ends, the red line shows the entry price, which is the opening price the week after a closes below the bottom of the chart pattern. In this case, that's 13.76 (on candle B).

The target is 7% below this, or 12.80.

The red sell line shows the exit location (marked 'Cover').

If the stock reversed before reaching the target, a stop placed 7% above the buy price would have closed out the trade. Alternatively, a stop placed a penny above
the top of the pattern would work as a pattern stop.